Unearned Revenue Explained

Take, for example, a business situation that would exist between a carpet cleaning company and a homeowner. Before any service takes place, the cleaning company shows up at the house and gives the homeowner an estimate. The homeowner seems pleased with the estimate and pays the cleaner on the spot. At this point, the cleaning company has acquired an unearned revenueliability. In all likelihood, the liability will be cleared overtime with service. Until then, the cleaning company has money that they have not yet earned: “unearned revenue.”